NAMA Status Update November 2009

Transcripts - NAMA Status Update November 2009

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gallenalliance Solicitors Business Centre No. 1 Lower Mayor Street International Financial Services Centre Dublin 1 Ireland
t: +353 (0)1 6903200 www.gallenalliance.com
This document is a general outline only and is not a
complete or conclusive statement of the law. Specific
legal advice should be sought before any action is taken.
NAMA will purchase the riskiest loans from the
BANKING AND FINANCIAL SERVICES GROUP BRIEFING banks in order to free up the bank’s capital and
ensure their capabilities to lend to consumers and
business.
NAMA: Status Update
The amount NAMA pays for these loans will be
November 2009 significantly lower than the book value currently
held by the banks on these assets. In his most
recent comments, the Minister said on average he
1. Introduction expects the loans will be discounted by 30% but
analysts believe this could vary from 17% to 38%
The legislation (the Bill) establishing the National for individual banks. Payment will be made in
Asset Management Agency (NAMA) was government or government backed bonds to be
published on the 10th September 2009 by the issued by NAMA.
Irish Minister for Finance (the Minister). The Bill
was the outcome of a consultation process that NAMA will have a duty to manage the loans in
took place after the draft legislation was published such a way as to achieve the best return. It will
in July. It has now been passed by both the Dáil also collect interest due and pursue debts in order
and the Seanad and is due to be signed into law to ensure a constant income stream and to recoup
this week. When and how NAMA is to come into the government investment.
motion both legally and in real terms, however,
remains unclear. 5. Risk Sharing
2. Purpose The Bill provides for some of the bonds issued by
NAMA to be in the form of subordinated debt.
The purpose of NAMA remains unchanged. Its
aim is to take high risk land and property Where assets are paid for using subordinated
development loans off the books of the country’s bonds, NAMA will be entitled to hold back full
banks in an attempt to free up their balance payment if the assets purchased do not perform
sheets making them more attractive to investors satisfactorily. The issue of subordinated debt is
and restoring the flow of credit to business and viewed by the government as a mechanism for
consumers. sharing the risk between NAMA and the banks.
3. Book Value of Assets to be Transferred The view is that by partly paying the banks in
subordinated bonds and suspending payment in
It was previously anticipated that NAMA would the event that the assets purchased with such
acquire bank assets with an estimated book value bonds do not meet NAMA’s projected forecasts,
of approximately €90 billion. This number has the banks will effectively be held partly
since been reduced to €77 billion. responsible thus reducing the risk to the taxpayer.
At a high level, it is now projected that 36% of the One downside to the sharing arrangement is the
assets acquired will be land, 28% development much higher rate of interest that subordinated
property and 36% associated commercial loans. bonds will attract because of the risk associated
with the debt. This has been quoted by the
4. Main Provisions Minister as the reason only a small percentage of
the bonds issued will be subordinated. (It is
currently anticipated that 5% of the bonds issued
These are essentially unchanged: by NAMA will be in the form of subordinated debt,
a proportion that has been criticised by some for
NAMA will be a separate statutory body and will being too small).
have all the necessary commercial powers of a
financial asset management company.
6. Who are the Participating Banks?
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A credit institution can apply to the Minister to be Once NAMA has identified the eligible bank
designated as a participating institution. The assets that it proposes to acquire and has
application must be made within 28 days of the determined the acquisition value for each of those
establishment date to be set for NAMA. The bank assets, NAMA will serve on the institution,
Minister will make his decision after consultation an acquisition schedule setting out the details of
with the Central Bank and Financial Regulator the acquisition.
based on, inter alia, the systematic importance of
the credit institution to the financial system or the NAMA will inherit all interest in the acquired
acquisition of the institution’s assets to fulfilling the assets and all obligations of the participating bank
purpose of the legislation. subject to any obligations or liabilities that are
excluded from the acquisition schedule.
It is currently anticipated that the following
institutions will be designated as participating The Bill also provides that the assets acquired by
institutions: NAMA will “over-reach” any equitable interest in
the land. This ensures that NAMA will acquire the
 Allied Irish Banks, p.l.c.; assets free of any unregistered charges or
burdens, regardless of whether or not the
 Anglo Irish Bank Corporation Limited; purchaser has notice of it.
 Bank of Ireland; 8. Valuation of Eligible Assets
 The Educational Building Society; and Each participating bank’s loan book will be
examined on a loan by loan basis to determine
whether the loan is to transfer into NAMA and, if
 The Irish Nationwide Building Society. so, at what value.
7. The Acquisition of Assets by NAMA NAMA will, according to a methodology that has
not yet been fully settled, take into account market
The participating institutions are subject to a duty value and long-term economic value and place an
of utmost good faith. This duty creates a high acquisition value on each eligible bank asset.
onus of responsibility on the institutions to make
full disclosure to NAMA of all relevant matters The concept of “long-term economic value”
concerning their loan assets. NAMA will then (LTEV) has been the cause of much debate and
decide which of these assets it will acquire. controversy. Under the Bill, the LTEV has been
defined as the value that the property can:
The assets which may be acquired by NAMA are reasonably be expected to attain in a stable
extremely broad and could potentially extend financial system when “current crisis conditions”
beyond development loans and other related prevailing at the time of passing of the legislation
security. The potential categories of assets are ameliorated. Unfortunately, “current crisis
include: conditions” have not been defined in the Bill and it
is feared that this will lead to difficulties in
 loans, whether wholly or partly funding the determining future values and may give rise to
development of land; litigation in the interpretation of same.
 loans where any element of the security The Bill prov i d e s that the LTEV is to be
consists of an interest in development land; determined by reference to the following factors:
 classes of loans where the overall  the current market value of the underlying
indebtedness is such that, in the opinion of the property security;
Minister, their acquisition is necessary for the
purposes of the legislation; and  the current market value of the bank asset;
and
 any other type of credit or financial
accommodation and any related rights  the LTEV of the underlying property.
designated by the Minister.
A participating institution may, in certain
Any loan created after 31 December 2008 will not circumstances, object to the valuation given to a
be eligible for acquisition by NAMA. However, group of assets by NAMA. If eligible for
refinanced or renegotiated loans which were consideration, the objection will be transferred to
originally made available prior to that date can be NAMA’s valuation panel (the Panel) for review.
acquired. The valuation panel is to comprise a maximum of
12 persons appointed by the Minister. Its role is to
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review the total portfolio acquisition value damages owing to third parties as a result of a
specified for an acquired portfolio by NAMA. wrongful transfer of assets.
The Panel will have 90 days to review a loan 12. Current Status
value and advise the Minister as to whether the
valuation is correct or not. Such an objection will The Bill has been passed by the Dáil and the
not prevent the asset transfer going ahead. If a Seanad and is now due to be signed into law by
valuation is to be adjusted, the bank will be paid or President Mary McAleese, unless the Bill is
a refund will be received by NAMA. referred to the Supreme Court for testing (which is
not currently expected).
9. Foreign Property
The Minister has indicated that lenders will
The Bill introduces special provisions to deal with formally confirm plans to participate in NAMA by
the significant portion of bank assets which are the year-end with loans to start being transferred
governed by laws other than those of Ireland. from January 2010. There is some doubt
surrounding this proposed timetable, however,
If the law governing the transfer of assets is especially given the fact that the Christmas
foreign law and that law permits the transfer, the holidays are fast-approaching and in light of
participating institution is obliged to do everything reports of a continued decline in the rental sector
necessary to effect the transfer. of the property market.
If the foreign law does not permit the transfer, the Another factor to consider in any assessment of
participating institution is obliged to do all that is how and when NAMA will come into play is the
permitted under the foreign law to transfer the requirement for the European Commission’s (the
greatest possible interest in the asset to NAMA. Commission) final approval on the entire NAMA
plan. The Minister, however, has stated that he
does not believe Brussels will delay the process.
10. Regulation of Participating Institutions This is the view of many others also, based on the
fact that the Commission has been involved
The Bill grants extensive powers to the Financial throughout the drafting of the Bill.
Regulator in restricting the conduct of the
participating banks. The Financial Regulator may, Ireland therefore continues to await the launch of
with the approval of the Minister, give a direction NAMA which may or may not take place this side
to the participating institution in order to achieve of 2010.
the purposes of the legislation. Such directions
can restrict balance sheet growth, require balance
sheet reduction and restrict or require If you would like to discuss the implications of the
consolidation and merger of participating above on your business or any other aspect of
institutions. banking and financial services law, please
contact:-
Furthermore, the Bill provides that the Minister
may direct the participating banks to draw up or Claire Trinder
amend a restructuring plan to ensure compliance Tel: 01 6903200
with the purposes of the legislation. ctrinder@gallenalliance.com
Where the Financial Regulator is of the opinion or any of your usual gallenalliance contacts.
that a participating institution has not complied
with a direction, he may apply to the Court for
such order to compel compliance with the
direction.
11. Sanctions
The Bill provides for sanctions in the event of
unauthorised disclosure of confidential
information, any failure of the participating
institutions to act in utmost good faith (an
obligation which places a high standard of conduct
on such institutions). Non-compliance with the
rules giving rise to the sanctions may leave the
offending institution liable in damages to NAMA.
The Bill also requires that the banks must agree to
indemnify NAMA or the NAMA group entity for
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